Tullow, founded in the 1980s to tap into African oil and gas, suffered a series of technical difficulties and missed production targets, leading its chief executive to step down late last year.
Now, along with the entire oil industry, it faces unprecedented turmoil in the oil markets as lockdowns to contain the new coronavirus have wiped out demand and the international oil price has lost roughly two thirds of its value since the start of the year.
Tullow’s shares have shed around 90% over the last 12 months and its market capitalisation had shrunk to around $285 million on Wednesday. Its shares were up around 39% at 0725 GMT at 27.99 pence, having earlier peaked at 35.5 pence.
“Tullow has achieved a decent price in a tough market at a difficult time. However, its ‘survival strategy’ requires the depletion of its opportunity set to pay down debt,” RBC analyst Al Stanton said in a note.
Tullow said on Thursday it will receive $500 million in cash for the Ugandan prospects and $75 million once a final investment decision is reached on the project.
Total said it had a good deal.
“We are pleased to announce that a new agreement has been reached with Tullow … for less than $2 a barrel in line with our strategy of acquiring long-term resources at low cost, and that we have an agreement with the Uganda government on the fiscal framework,” Total Chief Patrick Pouyanne said in a statement.
An agreement on a tax issue with the Ugandan authorities, which had delayed the sale of a smaller stake in the project to Total for months, has been reached in principle, Tullow said.
The deal depends on the two companies signing a final tax agreement with the Ugandan authorities and a green light from Tullow’s shareholders. It expects the deal to close in the second half of the year.
If completed, it would be the first significant deal in the oil sector since the price crisis began in earnest in early March.
Total will pay Tullow more once production has started and once the benchmark Brent oil price reaches $62 a barrel, Total said, compared with around $22 now.
The third partner in the 230,000 barrel per day project, China’s CNOOC, has pre-emption rights for half of the stake to be sold to Total.
Money from the sale will be used “to reduce Tullow’s net debt, strengthening the balance sheet and moving Tullow towards a more conservative capital structure,” Tullow said.
“Tullow has consulted with shareholders holding approximately 27.5% in aggregate of Tullow’s issued share capital and is pleased to report that they have indicated their support for the transaction,” it added.
Executive Chair Dorothy Thompson told Reuters that raising at least $1 billion from divestments would eliminate the prospect of any debt-for-equity swap.
To reach its divestment target, Tullow is also trying to sell stakes in undrilled exploration acreage and part or all of its stake in Kenya, where it also partners with Total.
Total is also seeking to reduce its Kenyan stake, sources told Reuters in January.